The German Monopolies Commission (Monopolkommission), an independent body advising the German federal government and legislature on competition law and policy, recently published its Twenty-second Biennial Report (“Report”) in which it outlined recommendations to adapt the German legal framework to account for what it characterized as new competition challenges faced by the increasing and irreversible digitisation of many parts of the economy (please see the Summary Report here and Press Release here, both available in English). Of particular interest is the Monopolies Commission’s proposed approach to anti-competitive algorithm-based pricing.

Background

The way consumers engage with suppliers has changed rapidly over the past few decades, with an increase in the number of these transactions being conducted online. Companies increasingly use algorithms to set their prices on the internet. The Report notes that, despite their numerous advantages, pricing algorithms may raise competition concerns if they facilitate and sustain collusion (even without any explicit anti-competitive agreement or human interaction). The Monopolies Commission expressed concern that pricing algorithms have the potential to have anti-competitive effects.

The Report explains that the ability of pricing algorithms to produce or facilitate anti-competitive collusion is heightened where the market is concentrated, involves homogeneous products, contains high barriers to entry and has a high degree of transparency.

Proposals of the Monopolies Commission

The Report covers a number of competition-related matters across its four chapters. However, in relation to pricing algorithms it makes two key proposals:

Monitoring of markets susceptible to coordinated pricing should be strengthened and systematic. The Report notes that competition sector inquiries could be especially useful in this regard as companies are obligated to provide the Federal Cartel Office (Bundeskartellamt) with information. In addition, the Monopolies Commission recommends that consumer associations be empowered to initiate such sector inquiries. In particular, consumer associations could be given the right to approach the Federal Cartel Office requesting that the Federal Cartel Office initiate a sector inquiry. The Federal Cartel Office would only be able to reject such requests on reasonable grounds. Further, in the event that competition rules are insufficient in a market where there are “concrete indications” that pricing algorithms are highly likely to lead to collusion, the Monopolies Commission suggests that the burden of proof with regard to the damage caused by an infringement of competition law be reversed. It suggests that this approach would allow for the financial losses resulting from the collusion to be assigned to the users of the pricing algorithms.

The liability of third parties that design pricing algorithms should be reviewed. Few companies create such algorithms themselves. Rather, they enlist IT service providers with expertise to do so. The Report notes that, at present, the liability of such providers for violation of competition law is dependent on whether the decision on the design of the algorithm is attributable to the company using the product or the IT service provider.

Conclusion

These policy recommendations remain just that, and it remains to be seen whether they will be adopted in part or in whole.

That said, these recommendations should not be viewed in isolation. The Federal Cartel Office, together with the French competition authority (Autorité de la concurrence), recently launched a joint project on algorithms and their potential anti-competitive effects.Further, in its 24 July 2018 press release regarding the fining of consumer electronics manufacturers Asus, Denon & Marantz, Philips and Pioneer for imposing fixed or minimum resale prices on their online retailers, the European Commission noted that the effect of such restrictions was magnified by the pricing algorithms used by many online retailers. Although the decision stops short of saying anything further about the use of such algorithms, it is the first time the Commission has made such a reference in the context of an infringement decision.

The European Parliament has also expressed concern in relation to pricing algorithms as discussed in their recent study which was the subject of a Covington Competition Blog post. The Covington team continues to monitor these developments.

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